Insurance for Small Businesses

Being a successful entrepreneur involves access to sufficient capital and business acumen among other necessities. Another important area that requires attention, contingent on the type of business, is insurance to protect business assets from potential risks.

This article will look at the types of insurance available to a small business owner, which might be worth further investigation. Please note that only some of the following types are deductible as business expenses; seek professional advice for more insight.

Insurance for business owners and key employees

Life insurance. As the name indicates and has been written about in the past, life insurance protects the surviving family members of the owner and/or key employees of the company and prevents debt obligations from sinking the remaining people.

Disability insurance. In case of a debilitating injury or illness, disabilityinsurance will provide the insured with income for a specified period of time.

Critical illness insurance. In the event of a critical illness, an insurance provider will provide the insured member with a lump sum benefit to at least partially offset the loss of employment income.

Partnership insurance. This type of insurance allows business partners to buy or sell shares of the corporation and facilitates the orderly transfer of business interests upon a partner’s death, disability or retirement.

Key person insurance. Some companies may have key employees who are vital to the continued success or even operation of the business. To mitigate the impact in case of a loss of such people, businesses can obtain key person insurance.

Insurance for business property

Property insurance. Businesses obtain property insurance to protect their physical assets from various risks such as fire, flood, theft, etc. It is important to identify the exclusions that might apply in an open peril policy.

Contents insurance. This type of insurance covers assets kept at the business premises. If the office space is leased, the property owner’s property insurance may not cover the contents stored on site as part of the business.

Vehicle insurance. As an important cog in the modern business world, vehicles need to be insured.

Liability insurance

General liability insurance. This type of insurance provides coverage if there is an injury to employees (or others) at the work site.

Product liability insurance. As the term indicates, product liability insurance offers coverage in case of a product made by the company is defective or causes serious injury to a user.

Professional liability insurance. Medical doctors, accountants, engineers, lawyers, etc. require separate insurance for protection in the event of a lawsuit arising due to their negligence, misrepresentation, errors, omissions, etc. in a professional capacity.

Third-party liability insurance. In order to mitigate the risks posed by the actions of a third-party, businesses may purchase this form of protection.

For further details on insurance types, finding the correct insurance and resources for assistance, please refer to this Canada Business page.

If you are/were a small business owner, would you say that some of these types are/were unnecessary for your undertaking? If so, what are/were the most significant ones for your line of work?

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About the author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.

Lemme see if I can clarify the first section, there’s some overlap and it doesn’t seem real clear to me the way it’s been described.

For individual owners, you should look at life insurance as part of your succession planning. If you haven’t done succession planning yet, you should start. Secondly, disability insurance can be used to replace lost business income in the event of your disability.

For partners: if your partner dies, meet your new parter – their spouse. The spouse doesn’t want your business ongoing, all they want is the value, in cash, today. And they have a say – they’re a partner. The solution? A legal agreement called a buy-sell. You both agree to sell each other’s shares back to each other in the event of your death. You then purchase a life insurance policy on each other’s lives to pay for these shares. Now if your partner dies, the shares are forced to be handed over to you, and the life insurance proceeds go to their spouse. You end up with the company, their spouse ends up with the value of their shares (from the life insurance). Everyone’s happy. If you’re not doing this yet, at least have a conversation. You need three parties involved – lawyer to draft the agreement, accountant to determine future value of the company and dot the i’s, and an insurance broker to shop for the cheapest insurance policy.

For partners: as above with life insurance, but now if your partner becomes permanently disabled. There’s disability insurance plans to cover that.

Key person insurance: If a key employee should pass, your business may suffer financially. Lost sales, recruiting and training costs. stuff like that. Solution is to purchase a life insurance policy on them. Typically solved with an inexpensive 10 year term policy.

And lastly, be cautious with critical illness insurance.
That’s the common life insurance related stuff for small businesses. If you have a large amount of retained earnings inside the corp then there are other strategies that use some of the tax advantages of life insurance policies. Those strategies can be beneficial, but they’re really financial planning and not insurance (i.e the strategies are tax manoevering, not covering risk).